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BBVA Say Headwinds Will Mean Low Growth In 2023

MEXICO
  • A series of factors are brewing that will have a negative impact on the economic growth of the country.
  • First of all, we are facing a process of slowdown in the US economy that will undoubtedly have a negative effect on the external sector of the Mexican economy. To control inflation, the Fed is raising interest rates and reducing the size of its balance sheet in order to achieve a contraction in aggregate demand. Also, fiscal policy, especially now that the new law to reduce inflation is implemented, will be less expansionary, which will also decrease aggregate demand. Among economists there is a huge discussion about whether these policies will or will not cause a recession. But what no one doubts is that in the remainder of this year and next, the United States economy will experience a significant economic slowdown.
  • Second, domestic monetary policy is being more restrictive, which will increase financing costs and, therefore, will have a negative effect on consumption and investment, especially in sectors that are more sensitive to interest rates such as construction (a sector that, due to the environment of uncertainty is in a situation of extreme weakness: its level is 19% lower than the observed in January 2019).
  • Third, there are several factors that are generating uncertainty towards investment and that, logically, will affect the future economic growth. The two most important, I think, have the same origin: the current energy policy. Not only is it creating uncertainty among investors as to whether they will have a reliable supply of electricity, at competitive prices and non-polluting, but also, by violating the T-MEC, it is generating uncertainty about the future of the trade relationship between Mexico and the United States.
  • Fourth, higher inflation is reducing the real disposable income of families, which will reduce the dynamism of consumption. BBVA real-time indicators of consumption, prepared with high-quality data frequency, show that consumption so far in the third quarter of the year has begun to lose strength.
  • Due to the above, it seems that economic growth in 2023 will be weaker compared to this year. BBVA estimate that will be in a range between 1% and 1.8%. In the medium term, however, it seems that Mexico could enter a path of higher growth if appropriate policy measures are taken.
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